CENTRAL BANKS.

Press, Volume LXII, Issue 18670, 20 April 1926, Page 8

CENTRAL BANKS.

fHEIR CONTROL OF CREDIT.

UTTLE INFLUENCE ON PRICES,

(By Hartley Withers.)

From an interesting paper, by Dr. Henry Chandler,' in a recent number of "Commerce, Monthly," published by the National Bank of Commerce in New York, it appears that there has been a good deal of discussion in America concerning the control exercised over credit in the United States by the Federal reserve system. Some maintain that the control has been powerful and beneficial, others have denied the stabilising character of the system's recent actions and havo attributed to it an. inflationary policy. A control, the results of which are open to such a wide difference of opinion, is evidently an influence which has not yet been measured with any approach to accuracy. The question is by no means one of merely academic interest, but is of very "practical moment to all who are engaged in any kind of business, to all who, hold investments and to all who buy' and sell goods—that is to say, to every man, woman and child of us. Because it is through the power of the central banks to control credit, that the stabilisation of prices is expected, with more or less conlidenco according to the view that one holds on this subject, to be secured.. If they are now doubting in America, as to whether the policy of the central banks has been effective in stabilising, or has produced inflation, it is clear that a great deal has yet to be done before we can look forward to the day when the index number of commodity prices will run in a straight line across our charts.

Effect' of Gold Standard,

Many people seem to think that since England has gone back to the gold standard this question of stabilisation by credit control has been abandoned there, and that prices will be left to the influence of the automatic action of the gold standard. But th,is is' by no means so. .. . In the first place the gold standard was not: nearly such an automatic machine as its critics seem to think. In pre-war days the state of the Bank of England's gold stock was a highly important item which the directors had to consider.. When deciding to'make, or refrain from, movements in their rate of discount, they exercised a wide latitude of discretion in the matter, as is shown by'the ( 'fact that the City was often in doubt as to what their action would be. Moreover, the' world has suffered . so acutely in recent years from the effects of fluctuations in prices, that efforts towards stability are now recognised as part of the duty of the central banks of all countries; and a conference of central banks has been proposed to discuss the'question of keeping- gold prices steady. In America the gold standard has long,been effective, though complicated by .the possession of an abnormal mass of gold;, nevertheless, controversy rages as to' the stabilisation policy of the Federal reserve system, showing that a gold* standard by no means ends the question.

,oredit Control Not All-P6werful. . With all deference to the distinguished authority of those who hold that trade and price's can be contracted and expanded like a concertina • through movements in the rates of central banks, \ there is surely good ground for the view ■ that in normal times the influence of 'credit manipulation may be greatly exaggerated. Even in normal times it is, not- all-powerful. The after-war boom ' and collapse are often attributed to the fact that the central banks, in London and/ New\ York; first delayed much top long in raising their rates and then raked them too quickly. But it is at ' letfet possible that the boom happened because everybody thought that a boom was- bound to follow war, and that as long as prices were rising, as they rose in'those "hectic days, nib raising-of the rate ; for money—short of a rise that / would have produced immediate panic—would have stopped it; and that the collapse came'because the public refused to buy at the prices asked/and as soon . as .'it was discovered that rising prices . we're not: part of the scheme of the commercial universe, the bottom fell out of the commodity markets. • , ; Jn ; normal times, when .business is proceeding on a more or less even keel, it,is by no means certain that trade does not influence money at least as much as money influences trade. As far as actual producers are concerned, the price that is paid for overdrafts and advances from banks, or for discounting bills is an almost negligible item in the cost of production; as long as manufacturers can, or- think they cah, v see their way to a ready market for their goods .they, will continue to turn them out. To merchants and' wholesale dealers who carry big stocks of goods on credit, the price or money is a much more serious consideration, but oven they are prpbably influenced more by the probability of a free off take by. the retailers than byarJy normal movement, in rates for money.

"Psychological Effect" Believers in the, almighty power, to ■wing trade and' prices, of the discount rates of central banks lay great stress on the psychological effect produced by their movements. They argue that when a rate is raised, with the object of making prices lower, all the business world knows that the authorities: are working for lower prices and accordingly . reduoo their commitments, - stop their demand for materials and finished goods, and so produce the result-aimed at by the central bank. But this contention leaves out the fact that prices do not all move in unison. A fall in the general average is quite compatible with a rise in several particular commodities. And it is the particular commodity that he produces or deals in that, exercises the' mind of the manufacturer or merchant. The tea merchant is not anxious about the index number of general prices, but about the price of tea. If, from his knowledge of the statistical position, he foresees scarcity, and consumption running ahead of production, he is not going to ' be frightened out of his holding by a rise in, the' price; of bank credit. As to the effectiveness.of falls in central bank rates in .promoting a rise in prices and a recovery, in trade, it must surely be evident that in certain moods .of the business world, when everyone is taking a gloomy view concerning the probable demand for goods, it would be impossible to stimulate optimism even by bringing down .the money rate to nothing—in fact, such a movement would only be marked as one more symptom of the hopelessness of the situation. ■••'.■ The price of money is a factor un- ' doubtedly, but it is not the only factor in the trade position, as seems to be believed by those enthusiasts who ; credit the central banks with overwhelming power over prices.